Debt crisis: as it happened - October 10, 2012

Klaus Regling, head of Europe's new bailout fund, says Spain does not look
like it's about to seek a rescue package because yields on its sovereign
bond are falling, as the IMF called for euro action to avert global
catastrophe.

The IMF issued a stark warning that the lack of decisive action by European governments and institutions risked tipping the global economy into deeper crisis.Photo: AP

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16.55 That's where we leave our live coverage for today. We'll be back first thing in the morning to pick up where we left off. Thanks for reading.

16.42 The European markets have closed for the day, making losses for the third consecutive session. Angus Campbell, head of market analysis at Capital Spreads, said:

Equity markets have done nothing but grind gradually lower in the past few days as the economic outlook both domestically and outside of the UK has deteriorated. Investors are struggling to find any rational reasons to considerably increase their exposure to equities when there are people left right and centre warning them of stormy waters ahead.

Even though our own Prime Minister in his speech to the party faithful attempted to sound as optimistic as possible about the future prospects for the UK economy, but the rather morose undertones poured a bucket of cold water on any reasons to celebrate.

Whilst the bulls seem incapable of lifting us higher, the bears are also unable to take control and push us significantly lower. Every time there’s a bit of bad economic data we should be seeing markets take a dive, but the prospect of more stimulus from central banks around the world seems to be creating rather a false environment.

The FTSE 100 has lost 0.38pc, the DAX dropped 0.27pc and the CAC slipped 0.33pc.

15.41 The head of Sweden's financial watchdog is, however, not keen on European banking union plans. He reckons they risk creating a division between members of the pact and those outside it.

He also cast doubt on the ECB's ability to supervise a sector as large as banking. Martin Andersson told reporters: "This would be at odds with what we have been working towards for so many years - the creation of a single market."

He stressed that banking supervision should be complemented by a system for dealing with failing banks before being introduced.

14.53 At 14.05, we mentioned that Mariano Rajoy said at his press conference that all banks should be supervised under a new banking union. That was echoed by Francois Hollande, who said that the European Central Bank’s proposed regulatory mandate must cover “even modest banks”. He added that “the regulator must be credible, and to be credible it must have a wide field to cover”.

14.30 We've also published a compilation of reaction to the BAE-EADS merger hitting the buffers. Etienne de Durand, director of security studies at IFRI, is not suprised that the deal failed:

Given the overall context it does not surprise me this failed - it was always going to be a risky project. Franco-German relations were already difficult because on the big issue, notably management of the eurozone crisis, the two sides don't see eye to eye either on the timing or the substance.

We see of course that it is Germany that has leadership on political and economic questions in Europe. France is in the pilot's cabin but it has not got its hand on the wheel. And that creates difficulties.

On Twitter, observers point out the lack of co-operation between France and Germany. But given the foot-dragging over the debt crisis, this perhaps comes as no surprise...

&lt;noframe&gt;Twitter: James Mackintosh - BAe-EADS deal abandoned. Given failure of European govts to co-operate on anything else, few should be surprised&lt;/noframe&gt;

14.16 Francois Hollande has been speaking about the failed BAE-EADS merger too (on which we have a full story up here). He said it was up to the companies to decide on their merger after government stated their conditions.

An EADS spokesperson has said that the French and UK governments were both in favour of the combination, while no firm reason was given for the German government's opposition.

14.05 Mr Rajoy also says that everyone agrees that clear progress is needed on banking union and that all banks should be supervised under a new banking union.

14.01 Spain's Mariano Rajoy has said he is confident that deficit targets can be reached this year. He adds that if Europe advances in integration, that will improve Spain's economic prospects.

13.43 Francois Hollande and Mariano Rajoy are now hosting a press conference in Paris. We'll bring you any relevant lines from that shortly.

13.21 German newspaper, Handelsblatt, is reporting today that Germany's leading economic thinktanks are set to halve their growth forecast for next year to 1pc. AFP has more details:

The four leading institutes - Ifo in Munich, IfW in Kiel, IW in Halle and RWI in Essen - are scheduled to publish their twice-yearly economic forecasts on Thursday.

Quoting sources familiar with the latest updated projections, Handelsblatt said that the think-tanks had also pared back their 2012 forecast to 0.8 percent from 0.9 percent previously.

And they expect Europe's top economy to expand by only 1.0 percent next year, instead of their earlier forecast of 2.0 percent.

Despite slowing growth, Germany's finances will show a more or less balanced budget both this year and next year, the institutes predict.

13.05 A brief corporate update. BAE and EADS have terminated their merger talks. Their full statement is here and we'll have a story up soon.

12.22 More job cuts in Spain. AFP reports that Spanish bank Sabadell has said it is cutting 1,350 of the roughly 6,000 jobs at troubled savings bank, Caja Mediterraneo, which it bought in December.

Management and unions agreed to the cuts at Caja Mediterraneo through early retirement, negotiated departures, redeployments and temporary suspensions, Sabadell said in a statement.

12.07 As we mentioned at 08.27, Francois Hollande and Mariano Rajoy are meeting in Paris today. Here's a couple of pictures of the pair at their pow-wow at the Elysee presidential palace:

11.48 A quick look at how the markets are faring this morning and equities are not in a good mood. The FTSE 100 is down 24 points to 5786; Germany's DAX is also down 24 points at 7210. Spain's IBEX is off 53 points to 7692.

11.09 Italy has held a short-term bond auction this morning, in which borrowing costs rose. It sold bonds due in three months and a year that raised €11bn.

The country sold €3bn in three-month bonds at a rate of 0.765pc compared to 0.7pc in the last similar auction in September.

The Treasury sold €8bn in 12-month bonds at a rate of 1.941pc compared to 1.692pc also in the September sale.

Italian sovereign debt continues to benefit from a more credible ECB-backed fiscal backstop and investors' willingness to differentiate more between Spain and Italy. However, today's sale, with a slight uptick in yields, is a reminder that Italy is by no means out of the woods. Although demand held firm, the fact that yields rose at a sale of short-dated paper is concerning and underscores the fragility of investor sentiment.

10.56 More unrest afoot in Greece. The country's main public and private sector labour unions have called a 24-hour strike on October 18 to protest against austerity measures. The strike coincides with a European summit.

10.43 Klaus Regling, head of Europe's new bailout fund - which launched yesterday, has been speaking to German newspaper, Die Zeit. He told the paper that Spain does not look like it's about to seek a rescue package because yields on its sovereign bonds have fallen. He said:

It depends on the government in Madrid and on market developments. The yields on the capital market have fallen for Spain, therefore the country is not currently disposed to getting aid.

She writes that "disgusting" protests, "outrageous" support from Germany's left wing leader for his Greek counterpart and "relief and satisfaction" is some of the media reaction following Mrs Merkel's meeting with Antonis Samaras.

Germany's biggest-selling tabloid, Bild, is the paper that attacks the "disgusting" protests, and just to add salt in German wounds, it adds "we always pay more".

10.15Christian Noyer, a European Central Bank official, has pushed back against calls for an ECB interest rate cut. In its latest forecasts for the European economy on Tuesday, the IMF said there was room for the ECB to lower rates to boost growth. But, Mr Noyer said the transmission of monetary policy was more important than the policy rate.

He added that the ECB's bond-buying programme, as well as progress towards a European banking union, should help allay fears about a break-up of the eurozone.

09.32 Spain's ongoing crisis has spurred nationalist tensions, with the ruling parties of Catalonia last month seeking guidance from Brussels on the legality of secession from Spain.

In the latest step in a growing political battle between Barcelona and Madrid, Spain's parliament yesterday voted to block Catalonia from holding a referendum on independence.

08.46 Relief for those on some of the lowest salaries in Italy. Mario Monti, the Italian prime minister, has unexpectedly cut the lowest income tax rates.

Italy will reduce by a percentage point the two lowest income-tax rates. The rate will drop to 22pc from 23pc for earners of less than €15,000 per year, and to 26pc from 27pc for earners of between €15,001 and €28,000.

The Italian government also said it would halve a planned increase in sales tax rates to a single percentage point. It is still promising to meet the budget goals it has agreed with the European Union, saying Italy will balance its budget in structural terms next year.

08.27 On the agenda today, is a meeting between Francois Hollande and Mariano Rajoy. They will be having a chinwag in Paris around 11am UK time.

Jens Weidmann, Bundesbank chief and a governing council member of the ECB, has already been speaking in Frankfurt. There, he said the ECB must make sure that the single currency retains its value. He added:

The central banks of the Eurosystem have the responsibility to ensure that people continue to be able to hold good and stable money in their hands. A currency can only be stable when citizens have trust in their central bank and recognize its will to keep prices stable.

08.15 Last night, the IMF issued a stark warning, saying that risks to the global financial system have increased as capital flight threatens to tear the eurozone apart. Bruno Waterfield, The Telegraph's man in Brussels, has more:

The IMF praised "significant and continuing efforts" by the eurozone, including proposals for a "banking union", the creation of a €500bn (£403bn) bail–out fund, and a European Central Bank pledge "to do whatever it takes" to protect the single currency.

But, in an important message to EU leaders ahead of a Brussels summit on deepening fiscal integration, banking union and bank recapitalisation next week, the IMF issued a stark warning that the lack of decisive action by European governments and institutions risked tipping the global economy into deeper crisis.

"Incremental policy making has been insufficient to fully allay market tensions, despite the recent market rally since end July," the report said. "Merely muddling through imposes increasingly higher costs, as the unchecked forces of fragmentation continue to gather speed and undermine the very foundations of the union – a common monetary policy, and economic and financial integration."

08.00 Good morning and welcome back to our live coverage of the eurozone debt crisis.